SC holds that for TDS purposes Employer can grant exemption to Employee without supporting evidence

Section 10 of the Income-tax Act grants tax exemption in the case of salaried employees, in respect of various allowances such as leave travel concession (LTC) under Section 10(5), conveyance allowance under Section 10(14) and the like, within the scope of prescribed conditions and monetary limits. Similarly, Section 17(2) provides that reimbursement of medical expenses within prescribed limits shall also enjoy tax exemption in the hands of employees.

In the above regard, one of the moot questions that has always been a matter of debate is whether an employer, for purposes of tax deduction at source (TDS), can grant exemption to such an allowance or reimbursement claimed exempt by the employee, on the basis of a declaration made by him in the matter or whether the employer is required under law to collect and examine supporting evidence in this regard before entertaining the employee’s claim.

LANDMARK SUPREME COURT JUDGMENT

For the first time ever, the Supreme Court, in the case of ‘Commissioner of Income-tax v/s. Larsen & Toubro Ltd. and Asea Brown Boveri Ltd.’ 313 ITR 1 (SC), had occasion to consider the short question as to whether the two employer companies were under statutory obligation under the Income-tax Act and/or the Rules to collect evidence that its employees had actually utilized the amounts paid towards LTC/conveyance allowance?

While delivering its brief but clear ruling, the Apex Court noted that the beneficiary of the exemption under Section 10(5) is an individual employee. There is no circular of the Central Board of Direct Taxes (CBDT) requiring the employer under Section 192 for purposes of deducting TDS from salary to collect and examine the supporting evidence to the declaration to be submitted by an employee. In view of the above, the Supreme Court dismissed the civil appeals filed by the Income-tax Department.

LESSER EMPLOYER BURDEN GREATER EMPLOYEE BENEFIT!

The aforesaid ruling of the Apex Court, being binding in nature, has far-reaching implications, both for employers and employees. It will ease off a lot of pressure on employers on account of alleged defaults by the tax department in the discharge of TDS obligations and also go to lessen the paperwork burden that they were required to bear here before. It will also benefit employees, in as much as, declarations made by them to their employers in support of their claims for exemption in respect of allowances and reimbursements will now be taken at their face value and no supporting evidence will be insisted upon, before such exemption claims are allowed for purposes of TDS.

Infact, many a time, an employee, though having utilized his allowance or having actually incurred expenditure, loses his claim for exemption merely because of lack of supporting paperwork. His appropriate declaration to the employer in this regard shall now be treated as sufficient to entitle him to claim the exemption.

However, here is a word of caution for employees. In case an employee’s tax return is taken up for scrutiny, his Assessing Officer can still ask for logical explanation in support of the claim for exemption, such as adequate source for the expenditure incurred in respect of the claim for utilization of the allowance or reimbursement made by the employer, in respect of which exemption is claimed by the employee. An employee would, therefore, be well advised to ensure that he is in a position to satisfactorily meet this obligation of justifying his claim for exemption, if the situation so arises.